For the year ended August 31, 2021, the following table is a summary of each Trusts TOB Trusts:
The Trusts engage in various portfolio investment strategies using derivative contracts both to increase the returns of the Trusts and/or to manage their
exposure to certain risks such as credit risk, equity risk, interest rate risk, foreign currency exchange rate risk, commodity price risk or other risks (e.g., inflation risk). Derivative financial instruments categorized by risk exposure are
included in the Schedules of Investments. These contracts may be transacted on an exchange or over-the-counter (OTC).
Futures
contracts are exchange-traded agreements between the Trusts and a counterparty to buy or sell a specific quantity of an underlying instrument at a specified price and on a specified date. Depending on the terms of a contract, it is settled either
through physical delivery of the underlying instrument on the settlement date or by payment of a cash amount on the settlement date. Upon entering into a futures contract, the Trusts are required to deposit initial margin with the broker in the form
of cash or securities in an amount that varies depending on a contracts size and risk profile. The initial margin deposit must then be maintained at an established level over the life of the contract. Amounts pledged, which are considered
restricted, are included in cash pledged for futures contracts in the Statements of Assets and Liabilities.
Securities deposited as initial margin
are designated in the Schedules of Investments and cash deposited, if any, are shown as cash pledged for futures contracts in the Statements of Assets and Liabilities. Pursuant to the contract, the Trusts agree to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in market value of the contract (variation margin). Variation margin is recorded as unrealized appreciation (depreciation) and, if any, shown as variation margin receivable (or payable) on
futures contracts in the Statements of Assets and Liabilities. When the contract is closed, a realized gain or loss is recorded in the Statements of Operations equal to the difference between the notional amount of the contract at the time it was
opened and the notional amount at the time it was closed. The use of futures contracts involves the risk of an imperfect correlation in the movements in the price of futures contracts and interest rates, foreign currency exchange rates or underlying
assets.
For such services, each Trust, except for MFL and MVF,
pays the Manager a monthly fee at an annual rate equal to the following percentages of the average weekly value of each Trusts managed assets:
For purposes of calculating these fees, managed assets are determined as total assets of the Trust (including
any assets attributable to money borrowed for investment purposes) less the sum of its accrued liabilities (other than money borrowed for investment purposes).
For such services, MFL and MVF pays the Manager a monthly fee at an annual rate equal to the following percentages of the average daily value of each
Trusts net assets:
For purposes of calculating
these fees, net assets mean the total assets of the Trust minus the sum of its accrued liabilities (which does not include liabilities represented by TOB Trusts and the liquidation preference of any outstanding preferred shares). It is
understood that the liquidation preference of any outstanding preferred stock (other than accumulated dividends) and TOB Trusts is not considered a liability in determining a Trusts NAV.
The Manager contractually agreed to waive its investment advisory fee with respect to any portion of each Trusts
assets invested in affiliated equity and fixed-income mutual funds and affiliated exchange-traded funds that have a contractual management fee through June 30, 2023. The agreement can be renewed for annual periods thereafter, and may be
terminated on 90 days notice, each subject to approval by a majority of the Trusts Independent Trustees. For the year ended August 31, 2021, there were no fees waived by the Manager pursuant to this arrangement.
The Manager, for MFL, voluntarily agreed to waive its investment advisory fee on the proceeds of the Preferred Shares and TOB Trusts that exceed 35% of
total assets minus the sum of its accrued liabilities (which does not include liabilities represented by TOB Trusts and the liquidation preference of any outstanding preferred shares). The voluntary waiver may be reduced or discontinued at any time
without notice. This amount is included in fees waived and/or reimbursed by the Manager in the Statements of Operations. For the year ended August 31, 2021 the waiver was $313,118.
It is each Trusts policy to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment
companies, and to distribute substantially all of its taxable income to its shareholders. Therefore, no U.S. federal income tax provision is required.
Each Trust files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations
on each Trusts U.S. federal tax returns generally remains open for a period of three fiscal years after they are filed. The statutes of limitations on each Trusts state and local tax returns may remain open for an additional year
depending upon the jurisdiction.
Management has analyzed tax laws and regulations and their application to the Trusts as of August 31, 2021,
inclusive of the open tax return years, and does not believe that there are any uncertain tax positions that require recognition of a tax liability in the Trusts financial statements.
U.S. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These
reclassifications have no effect on net assets or NAVs per share. As of period end, the following permanent differences attributable to non-deductible expenses and amortization methods on fixed income
securities were reclassified to the following accounts:
As of period end, the tax components of accumulated earnings (loss) were as follows:
During the year ended August 31, 2021, the Trusts listed below utilized the following amounts of their
respective capital loss carryforward:
As of August 31, 2021, gross unrealized appreciation and depreciation based on cost of investments (including short
positions and derivatives, if any) for U.S. federal income tax purposes were as follows:
In the normal course of business, the Trusts invest in securities or other instruments and may enter into certain transactions, and such activities
subject each Trust to various risks, including among others, fluctuations in the market (market risk) or failure of an issuer to meet all of its obligations. The value of securities or other instruments may also be affected by various factors,
including, without limitation: (i) the general economy; (ii) the overall market as well as local, regional or global political and/or social instability; (iii) regulation, taxation or international tax treaties between various
countries; or (iv) currency, interest rate and price fluctuations. Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issues, recessions, or other events could have a
significant impact on the Trusts and their investments.
The Trusts may hold a
significant amount of bonds subject to calls by the issuers at defined dates and prices. When bonds are called by issuers and the Trusts reinvest the proceeds received, such investments may be in securities with lower yields than the bonds
originally held, and correspondingly, could adversely impact the yield and total return performance of a Trust.
A Trust structures and
sponsors the TOB Trusts in which it holds TOB Residuals and has certain duties and responsibilities, which may give rise to certain additional risks including, but not limited to, compliance, securities law and operational risks.
Should short-term interest rates rise, the Trusts investments in the TOB Trusts may adversely affect the Trusts net investment income and
dividends to Common Shareholders. Also, fluctuations in the market value of municipal bonds deposited into the TOB Trust may adversely affect the Trusts NAVs per share.
The U.S. Securities and Exchange Commission (SEC) and various federal banking and housing agencies have adopted credit risk retention rules
for securitizations (the Risk Retention Rules). The Risk Retention Rules would require the sponsor of a TOB Trust to retain at least 5% of the credit risk of the underlying assets supporting the TOB Trusts municipal bonds. The Risk
Retention Rules may adversely affect the Trusts ability to engage in TOB Trust transactions or increase the costs of such transactions in certain circumstances.
TOB Trusts constitute an important component of the municipal bond market. Any modifications or changes to rules governing TOB Trusts may adversely impact
the municipal market and the Trusts, including through reduced demand for and liquidity of municipal bonds and increased financing costs for municipal issuers. The ultimate impact of any potential modifications on the TOB Trust market and the
overall municipal market is not yet certain.
Each Trust may invest without limitation in illiquid or less liquid investments or investments in which
no secondary market is readily available or which are otherwise illiquid, including private placement securities. A Trust may not be able to readily dispose of such investments at prices that approximate those at which a Trust could sell such
investments if they were more widely traded and, as a result of such illiquidity, a Trust may have to sell other investments or engage in borrowing transactions if necessary to raise funds to meet its obligations. Limited liquidity can also affect
the market price of investments, thereby adversely affecting a Trusts NAV and ability to make dividend distributions. Privately issued debt securities are often of below investment grade quality, frequently are unrated and present many of the
same risks as investing in below investment grade public debt securities.
Municipal securities are subject to the risk that litigation, legislation or other political events, local
business or economic conditions, credit rating downgrades, or the bankruptcy of the issuer could have a significant effect on an issuers ability to make payments of principal and/or interest or otherwise affect the value of such securities.
Municipal securities can be significantly affected by political or economic changes, including changes made in the law after issuance of the securities, as well as uncertainties in the municipal market related to, taxation, legislative changes or
the rights of municipal security holders, including in connection with an issuer insolvency. Municipal securities backed by current or anticipated revenues from a specific project or specific assets can be negatively affected by the discontinuance
of the tax benefits supporting the project or assets or the inability to collect revenues for the project or from the assets. Municipal securities may be less liquid than taxable bonds, and there may be less publicly available information on the
financial condition of municipal security issuers than for issuers of other securities.
An outbreak of respiratory disease caused by a novel
coronavirus has developed into a global pandemic and has resulted in closing borders, quarantines, disruptions to supply chains and customer activity, as well as general concern and uncertainty. The impact of this pandemic, and other global health
crises that may arise in the future, could affect the economies of many nations, individual companies and the market in general in ways that cannot necessarily be foreseen at the present time. This pandemic may result in substantial market
volatility and may adversely impact the prices and liquidity of a funds investments. The duration of this pandemic and its effects cannot be determined with certainty.
With exchange-traded futures, there is less counterparty credit risk to the
Trusts since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, credit risk is limited to failure of the
clearinghouse. While offset rights may exist under applicable law, a Trust does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default (including the bankruptcy or insolvency). Additionally,
credit risk exists in exchange-traded futures with respect to initial and variation margin that is held in a clearing brokers customer accounts. While clearing brokers are required to segregate customer margin from their own assets, in the
event that a clearing broker becomes insolvent or goes into bankruptcy and at that time there is a shortfall in the aggregate amount of margin held by the clearing broker for all its clients, typically the shortfall would be allocated on a pro rata
basis across all the clearing brokers customers, potentially resulting in losses to the Trusts.
Certain Trusts invest a
substantial amount of their assets in issuers located in a single state or limited number of states. When a Trust concentrates its investments in this manner, it assumes the risk that economic, regulatory, political or social conditions affecting
that state or group of states could have a significant impact on the fund and could affect the income from, or the value or liquidity of, the funds portfolio. Investment percentages in specific states or U.S. territories are presented in the
Schedules of Investments.
The Trusts invest a significant portion of their assets in securities within a single or limited number of market sectors.
When a Trust concentrates its investments in this manner, it assumes the risk that economic, regulatory, political and social conditions affecting such sectors may have a significant impact on the Trust and could affect the income from, or the value
or liquidity of, the Trusts portfolio. Investment percentages in specific sectors are presented in the Schedules of Investments.
The Trusts
invest a significant portion of their assets in fixed-income securities and/or use derivatives tied to the fixed-income markets. Changes in market interest rates or economic conditions may affect the value and/or liquidity of such investments.
Interest rate risk is the risk that prices of bonds and other fixed-income securities will increase as interest rates fall and decrease as interest rates rise. The Trusts may be subject to a greater risk of rising interest rates due to the current
period of historically low rates.
Each of BYM, and BLE is authorized to issue an unlimited number of shares, including Preferred Shares, par value $0.001 per share, all of which were
initially classified as Common Shares. The Board is authorized, however, to reclassify any unissued Common Shares to Preferred Shares without the approval of Common Shareholders.
MFL is authorized to issue an unlimited number of shares, including 1 million Preferred Shares, par value $0.10 per share.
MVF is authorized to issue 160 million shares, 150 million of which were initially classified as Common Shares, par value $0.10 per share and
10 million of which were classified as Preferred Shares, par value $0.10 per share.
For the year ended August 31, 2021 and the year ended August 31, 2020, shares issued and outstanding remained
constant for MFL and MVF.
For the year ended August 31, 2021, Common Shares of BLE issued and outstanding increased by 25,061,561 as a result of
the reorganization of BSD, MFT and BBF with and into BLE.
For the year ended August 31, 2021, Common Shares of BLE issued and outstanding
decreased by 25 as a result of a redemption of fractional shares from the reorganization of BSD, MFT and BBF with and into BLE.
The Trusts
participate in an open market share repurchase program (the Repurchase Program). From December 1, 2019 through November 30, 2020, each Trust may repurchase up to 5% of its outstanding common shares under the Repurchase Program,
based on common shares outstanding as of the close of business on November 30, 2019, subject to certain conditions. From December 1, 2020 through November 30, 2021, each Trust may repurchase up to 5% of its outstanding common shares
under the Repurchase Program, based on common shares outstanding as of the close of business on November 30, 2020, subject to certain conditions. There is no assurance that the Trusts will purchase shares in any particular amounts. For the year
ended August 31, 2021, the Trusts did not repurchase any shares.
A Trusts Preferred Shares rank prior to its Common Shares as to the payment of dividends by the Trust and distribution of assets upon dissolution or
liquidation of the Trust. The 1940 Act prohibits the declaration of any dividend on Common Shares or the repurchase of Common Shares if the Trust fails to maintain asset coverage of at least 200% of the liquidation preference of the Trusts
outstanding Preferred Shares. In addition, pursuant to the Preferred Shares governing instruments, a Trust is restricted from declaring and paying dividends on classes of shares ranking junior to or on parity with its Preferred Shares or
repurchasing such shares if the Trust fails to declare and pay dividends on the Preferred Shares, redeem any Preferred Shares required to be redeemed under the Preferred Shares governing instruments or comply with the basic maintenance amount
requirement of the ratings agencies rating the Preferred Shares.
Holders of Preferred Shares have voting rights equal to the voting rights of holders
of Common Shares (one vote per share) and vote together with holders of Common Shares (one vote per share) as a single class on certain matters. Holders of Preferred Shares, voting as a separate class, are also entitled to (i) elect two members
of the Board, (ii) elect the full Board if dividends on the Preferred Shares are not paid for a period of two years and (iii) a separate class vote to amend the Preferred Share governing documents. In addition, the 1940 Act requires the
approval of the holders of a majority of any outstanding Preferred Shares, voting as a separate class, to (a) adopt any plan
of reorganization that would
adversely affect the Preferred Shares, (b) change a Trusts sub-classification as a closed-end investment company or change its fundamental investment
restrictions or (c) change its business so as to cease to be an investment company.
Subject to certain
conditions, the VRDP Shares may also be redeemed, in whole or in part, at any time at the option of a VRDP Trust. The redemption price per VRDP Share is equal to the liquidation preference per share plus any outstanding unpaid dividends.
The VRDP Shares are also subject to a purchase agreement in connection with the liquidity feature. In the event a purchase
agreement is not renewed or is terminated in advance, and the VRDP Shares do not become subject to a purchase agreement with an alternate liquidity provider, the VRDP Shares will be subject to mandatory purchase by the liquidity provider prior to
the termination of the purchase agreement. In the event of such mandatory purchase, a VRDP Trust is required to redeem the VRDP Shares six months after the purchase date. Immediately after such mandatory purchase, the VRDP Trust is required to begin
to segregate liquid assets with its custodian to fund the redemption. There is no assurance that a VRDP Trust will replace such redeemed VRDP Shares with any other preferred shares or other form of leverage.
Prior to the expiration date, the VRDP Trust and the VRDP Shares holder may mutually agree to extend the special rate
period. If a special rate period is not extended, the VRDP Shares will revert to remarketable securities upon the termination of the special rate period and will be remarketed and available for purchase by qualified institutional investors.
During the special rate period: (i) the liquidity and fee agreements remain in effect, (ii) VRDP Shares remain subject to mandatory redemption
by the VRDP Trust on the maturity date, (iii) VRDP Shares will not be remarketed or subject to optional or mandatory tender events, (iv) the VRDP Trust is required to comply with the same asset coverage, basic maintenance amount and
leverage requirements for the VRDP Shares as is required when the VRDP Shares are not in a special rate period, (v) the VRDP Trust will pay dividends monthly based on the sum of an agreed upon reference rate and a percentage per annum based on
the long-term ratings assigned to the VRDP Shares and (vi) the VRDP Trust will pay nominal or no fees to the liquidity provider and remarketing agent.
provider or the VRDP Shares
may adversely affect the dividend rate paid on such shares, although the dividend rate paid on the VRDP Shares is not directly based upon either short-term rating. In the event of a failed remarketing, the dividend rate of the VRDP Shares will be
reset to a maximum rate. The maximum rate is determined based on, among other things, the long-term preferred share rating assigned to the VRDP Shares and the length of time that the VRDP Shares fail to be remarketed.
For the year ended August 31, 2021, the annualized dividend rate for the VRDP Shares were as follows:
For the year ended August 31, 2021, VRDP Shares issued and outstanding of each VRDP Trust remained constant.
BYM, BLE and MVF (for purposes of this section,
each a VMTP Trust) have issued Series W-7 VMTP Shares, $100,000 liquidation preference per share, in one or more privately negotiated offerings to qualified institutional buyers as defined pursuant
to Rule 144A under the Securities Act. The VMTP Shares are subject to certain restrictions on transfer, and a VMTP Trust may also be required to register its VMTP Shares for sale under the Securities Act under certain circumstances. As of period
end, the VMTP Shares outstanding and assigned long-term ratings were as follows:
Subject to certain conditions, VMTP Shares may
be redeemed, in whole or in part, at any time at the option of the VMTP Trust. With respect to each VMTP Trust, the redemption price per VMTP Share is equal to the liquidation preference per share plus any outstanding unpaid dividends and applicable
redemption premium. If each VMTP Trust redeems the VMTP Shares prior to the term redemption date and the VMTP Shares have long-term ratings above A1/A+ or its equivalent by the ratings agencies then rating the VMTP Shares, then such redemption
may be subject to a prescribed redemption premium (up to 2% of the liquidation preference) payable to the holder of the VMTP Shares based on the time remaining until the term redemption date, subject to certain exceptions for redemptions that are
required to comply with minimum asset coverage requirements.
For the year ended August 31, 2021, the average annualized dividend rates for the VMTP Shares were as follows:
For the year ended August 31, 2021, VMTP Shares issued and outstanding of BYM and MVF remained constant.
For the year ended August 31, 2021, VMTP Shares issued and outstanding for BLE increased by 1,514 due to the reorganizations of BSD, MFT and BBF with
and into BLE.
Managements evaluation of the impact of all subsequent events on the Trusts financial statements was completed through the date the financial
statements were issued and the following items were noted:
The Trusts declared and paid or will pay distributions to Common Shareholders and
Preferred Shareholders as follows:
On September 27, 2021, the Board of Trustees of MFL and the Board of Directors of BlackRock Municipal Income
Fund, Inc (MUI) each approved the reorganization of MFL into MUI. Subject to the approvals by each Funds shareholders, the potential refinancing of preferred shares and the satisfaction of customary closing conditions, the
reorganization is expected to occur in the first half of 2022.
On September 27, 2021, each Trust announced a continuation of its open market
share repurchase program. Commencing on December 1, 2021, each Trust may repurchase through November 30, 2022, up to 5% of its common shares outstanding as of the close of business on November 30, 2021, subject to certain conditions.
There is no assurance that the Trusts will purchase shares in any particular amounts.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees/Directors of BlackRock Municipal Income
Quality Trust, BlackRock Municipal Income Trust II, BlackRock MuniHoldings Investment Quality Fund, and BlackRock MuniVest Fund, Inc.:
Opinion on
the Financial Statements and Financial Highlights
We have audited the accompanying statements of assets and liabilities of BlackRock Municipal
Income Quality Trust, BlackRock Municipal Income Trust II, BlackRock MuniHoldings Investment Quality Fund, and BlackRock MuniVest Fund, Inc. (the Funds), including the schedules of investments, as of August 31, 2021, the related
statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended, and the
related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Funds as of August 31, 2021, and the results of their operations and their cash flows for
the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in
the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Funds management. Our responsibility is to express an opinion on
the Funds financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect
to the Funds in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Funds are not required to have, nor were we engaged to perform, an audit of their internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Funds internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement
of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial
highlights. Our procedures included confirmation of securities owned as of August 31, 2021, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that
our audits provide a reasonable basis for our opinion.
Deloitte & Touche LLP
Boston, Massachusetts
October 20, 2021
We have served as the auditor of one or more BlackRock investment companies since 1992.
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R E P O R T O F
I N D E P E N D E N T R E G I
S T E R E D P U B L I C A C C
O U N T I N G F I R M
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75
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Important Tax Information (unaudited)
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For the fiscal period ended April 12,
2021, the Funds designate the following amounts paid as exempt-interest dividends:
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Fund Name
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Exempt-Interest
Dividends
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BSD
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$ 5,448,790
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MFT
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5,078,570
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BBF
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4,507,379
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76
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2 0 2 1 B L A C
K R O C K A N N U A L R E P O
R T T O S H A R E H O L D E
R S
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Disclosure of Investment Advisory Agreements
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The Boards of Directors/Trustees, as applicable (collectively, the Board, the members of which are referred to as Board Members)
of BlackRock Municipal Income Quality Trust (BYM), BlackRock Municipal Income Trust II (BLE), BlackRock MuniHoldings Investment Quality Fund (MFL) and BlackRock MuniVest Fund, Inc. (MVF and
collectively with BYM, BLE and MFL, the Funds and each, a Fund) met on May 4, 2021 (the May Meeting) and June 8-9, 2021 (the June Meeting) to consider the
approval to continue the investment advisory agreements (the Advisory Agreements) or (the Agreements) between each Fund and BlackRock Advisors, LLC (the Manager or BlackRock), each Funds
investment advisor.
The Approval Process:
Consistent with the requirements of the Investment Company Act of 1940 (the 1940 Act), the Board considers the approval of the continuation of
the Agreements for each Fund on an annual basis. The Board members whom are not interested persons of each Fund, as defined in the 1940 Act, are considered independent Board members (the Independent Board Members). The
Boards consideration entailed a year-long deliberative process during which the Board and its committees assessed BlackRocks various services to each Fund, including through the review of written materials and oral presentations, and the
review of additional information provided in response to requests from the Independent Board Members. The Board had four quarterly meetings per year, each typically extending for two days, as well as additional ad hoc meetings and executive sessions
throughout the year, as needed. The committees of the Board similarly met throughout the year. The Board also had a fifth one-day meeting to consider specific information surrounding the renewal of the
Agreements. In particular, the Board assessed, among other things, the nature, extent and quality of the services provided to each Fund by BlackRock, BlackRocks personnel and affiliates, including (as applicable): investment management
services; accounting oversight; administrative and shareholder services; oversight of each Funds service providers; risk management and oversight; and legal, regulatory and compliance services. Throughout the year, including during the
contract renewal process, the Independent Board Members were advised by independent legal counsel, and met with independent legal counsel in various executive sessions outside of the presence of BlackRocks management.
During the year, the Board, acting directly and through its committees, considered information that was relevant to its annual consideration of the
renewal of the Agreements, including the services and support provided by BlackRock to each Fund and its shareholders. BlackRock also furnished additional information to the Board in response to specific questions from the Board. Among the matters
the Board considered were: (a) investment performance for one-year, three-year, five-year, and/or since inception periods, as applicable, against peer funds, relevant benchmarks, and other performance
metrics, as applicable, as well as BlackRock senior managements and portfolio managers analyses of the reasons for any outperformance or underperformance relative to its peers, benchmarks, and other performance metrics, as applicable;
(b) leverage management, as applicable; (c) fees, including advisory, administration, if applicable, and other amounts paid to BlackRock and its affiliates by each Fund for services; (d) Fund operating expenses and how BlackRock
allocates expenses to each Fund; (e) the resources devoted to risk oversight of, and compliance reports relating to, implementation of each Funds investment objective, policies and restrictions, and meeting regulatory requirements;
(f) BlackRocks and each Funds adherence to applicable compliance policies and procedures; (g) the nature, character and scope of non-investment management services provided by BlackRock
and its affiliates and the estimated cost of such services, as available; (h) BlackRocks and other service providers internal controls and risk and compliance oversight mechanisms; (i) BlackRocks implementation of the
proxy voting policies approved by the Board; (j) execution quality of portfolio transactions; (k) BlackRocks implementation of each Funds valuation and liquidity procedures; (l) an analysis of management fees paid to
BlackRock for products with similar investment mandates across the open-end fund, closed-end fund, sub-advised mutual fund,
collective investment trust and institutional separate account product channels, as applicable, and the similarities and differences between these products and the services provided as compared to each Fund; (m) BlackRocks compensation
methodology for its investment professionals and the incentives and accountability it creates, along with investment professionals investments in the fund(s) they manage; (n) periodic updates on BlackRocks business; and
(o) each Funds market discount/premium compared to peer funds.
Prior to and in preparation for the May Meeting, the Board received and
reviewed materials specifically relating to the renewal of the Agreements. The Independent Board Members are continuously engaged in a process with their independent legal counsel and BlackRock to review the nature and scope of the information
provided to the Board to better assist its deliberations. The materials provided in connection with the May Meeting included, among other things: (a) information independently compiled and prepared by Broadridge Financial Solutions, Inc.
(Broadridge), based on Lipper classifications, regarding each Funds fees and expenses as compared with a peer group of funds as determined by Broadridge (Expense Peers) and the investment performance of each Fund as
compared with a peer group of funds (Performance Peers); (b) information on the composition of the Expense Peers and Performance Peers and a description of Broadridges methodology; (c) information on the estimated profits
realized by BlackRock and its affiliates pursuant to the Agreements and a discussion of fall-out benefits to BlackRock and its affiliates; (d) a general analysis provided by BlackRock concerning
investment management fees received in connection with other types of investment products, such as institutional accounts, sub-advised mutual funds, closed-end funds,
and open-end funds, under similar investment mandates, as applicable; (e) a review of non-management fees; (f) the existence, impact and sharing of potential
economies of scale, if any, with each Fund; (g) a summary of aggregate amounts paid by each Fund to BlackRock; and (h) various additional information requested by the Board as appropriate regarding BlackRocks and each Funds
operations.
At the May Meeting, the Board reviewed materials relating to its consideration of the Agreements. As a result of the discussions that
occurred during the May Meeting, and as a culmination of the Boards year-long deliberative process, the Board presented BlackRock with questions and requests for additional information. BlackRock responded to these questions and requests with
additional written information in advance of the June Meeting.
At the June Meeting, the Board concluded its assessment of, among other things:
(a) the nature, extent and quality of the services provided by BlackRock; (b) the investment performance of each Fund as compared to its Performance Peers and to other metrics, as applicable; (c) the advisory fee and the estimated
cost of the services and estimated profits realized by BlackRock and its affiliates from their relationship with each Fund; (d) each Funds fees and expenses compared to its Expense Peers; (e) the existence and sharing of potential
economies of scale; (f) any fall-out benefits to BlackRock and its affiliates as a result of BlackRocks relationship with each Fund; and (g) other factors deemed relevant by the Board Members.
The Board also considered other matters it deemed important to the approval process, such as other payments made to BlackRock or its affiliates
relating to securities lending and cash management, and BlackRocks services related to the valuation and pricing of Fund portfolio holdings. The Board noted the willingness of BlackRocks personnel to engage in open, candid discussions
with the Board. The Board Members did not identify any particular information, or any single factor as determinative, and each Board Member may have attributed different weights to the various items and factors considered.
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D I S C L O S U R
E O F I N V E S T M E N T A
D V I S O R Y A G R E E M E
N T S
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77
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Disclosure of Investment Advisory Agreements (continued)
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A. Nature, Extent and Quality of the Services Provided by BlackRock
The Board, including the Independent Board Members, reviewed the nature, extent and quality of services provided by BlackRock, including the
investment advisory services, and the resulting performance of each Fund. Throughout the year, the Board compared Fund performance to the performance of a comparable group of closed-end funds, relevant
benchmarks, and performance metrics, as applicable. The Board met with BlackRocks senior management personnel responsible for investment activities, including the senior investment officers. The Board also reviewed the materials provided by
each Funds portfolio management team discussing each Funds performance, investment strategies and outlook.
The Board considered, among
other factors, with respect to BlackRock: the number, education and experience of investment personnel generally and each Funds portfolio management team; research capabilities; investments by portfolio managers in the funds they manage;
portfolio trading capabilities; use of technology; commitment to compliance; credit analysis capabilities; risk analysis and oversight capabilities; and the approach to training and retaining portfolio managers and other research, advisory and
management personnel. The Board also considered BlackRocks overall risk management program, including the continued efforts of BlackRock and its affiliates to address cybersecurity risks and the role of BlackRocks Risk &
Quantitative Analysis Group. The Board engaged in a review of BlackRocks compensation structure with respect to each Funds portfolio management team and BlackRocks ability to attract and retain high-quality talent and create
performance incentives.
In addition to investment advisory services, the Board considered the nature and quality of the administrative and other non-investment advisory services provided to each Fund. BlackRock and its affiliates provide each Fund with certain administrative, shareholder and other services (in addition to any such services provided to each
Fund by third parties) and officers and other personnel as are necessary for the operations of each Fund. In particular, BlackRock and its affiliates provide each Fund with administrative services including, among others: (i) responsibility for
disclosure documents, such as the prospectus and the statement of additional information in connection with the initial public offering, registration statements in connection with BLEs equity shelf program and periodic shareholder reports;
(ii) preparing communications with analysts to support secondary market trading of each Fund; (iii) oversight of daily accounting and pricing; (iv) responsibility for periodic filings with regulators and stock exchanges;
(v) overseeing and coordinating the activities of third-party service providers including, among others, each Funds custodian, fund accountant, transfer agent, and auditor; (vi) organizing Board meetings and preparing the materials
for such Board meetings; (vii) providing legal and compliance support; (viii) furnishing analytical and other support to assist the Board in its consideration of strategic issues such as the merger, consolidation or repurposing of certain closed-end funds; and (ix) performing or managing administrative functions necessary for the operation of each Fund, such as tax reporting, expense management, fulfilling regulatory filing requirements, and
shareholder call center and other services. The Board reviewed the structure and duties of BlackRocks fund administration, shareholder services, and legal and compliance departments and considered BlackRocks policies and procedures for
assuring compliance with applicable laws and regulations. The Board considered the operation of BlackRocks business continuity plans, including in light of the ongoing COVID-19 pandemic.
B. The Investment Performance of each Fund and BlackRock
The Board, including the Independent Board Members, reviewed and considered the performance history of each Fund throughout the year and at the May
Meeting. In preparation for the May Meeting, the Board was provided with reports independently prepared by Broadridge, which included an analysis of each Funds performance as of December 31, 2020, as compared to its Performance Peers. The
performance information is based on net asset value (NAV), and utilizes Lipper data. Lippers methodology calculates a funds total return assuming distributions are reinvested on the ex-date at a
funds ex-date NAV. Broadridge ranks funds in quartiles, ranging from first to fourth, where first is the most desirable quartile position and fourth is the least desirable. In connection with its review,
the Board received and reviewed information regarding the investment performance of each Fund as compared to its Performance Peers and a custom peer group of funds as defined by BlackRock (Customized Peer Group) and a composite measuring
a blend of total return and yield (Composite). The Board and its Performance Oversight Committee regularly review and meet with Fund management to discuss the performance of each Fund throughout the year.
In evaluating performance, the Board focused particular attention on funds with less favorable performance records. The Board also noted that while it
found the data provided by Broadridge generally useful, it recognized the limitations of such data, including in particular, that notable differences may exist between a fund and its Performance Peers (for example, the investment objectives and
strategies). Further, the Board recognized that the performance data reflects a snapshot of a period as of a particular date and that selecting a different performance period could produce significantly different results. The Board also acknowledged
that long-term performance could be impacted by even one period of significant outperformance or underperformance, and that a single investment theme could have the ability to disproportionately affect long-term performance.
The Board noted that for each of the one-, three- and five-year periods reported, BYM ranked in the third quartile
against its Customized Peer Group Composite. The Board noted that BlackRock believes that the Customized Peer Group Composite is an appropriate performance metric for BYM, and that BlackRock has explained its rationale for this belief to the Board.
The Board and BlackRock reviewed BYMs underperformance relative to its Customized Peer Group Composite during the applicable periods.
The Board
noted that for each of the one-, three- and five-year periods reported, BLE ranked in the first quartile against its Customized Peer Group Composite. The Board noted that BlackRock believes that the Customized
Peer Group Composite is an appropriate performance metric for BLE, and that BlackRock has explained its rationale for this belief to the Board.
The
Board noted that for the one-, three- and five-year periods reported, MFL ranked in the third, third and fourth quartiles, respectively, against its Customized Peer Group Composite. The Board noted that
BlackRock believes that the Customized Peer Group Composite is an appropriate performance metric for MFL, and that BlackRock has explained its rationale for this belief to the Board. The Board and BlackRock reviewed MFLs underperformance
relative to its Customized Peer Group Composite during the applicable periods.
The Board noted that for the
one-, three- and five-year periods reported, MVF ranked in the third, first and first quartiles, respectively, against its Customized Peer Group Composite. The Board noted that BlackRock believes that the
Customized Peer Group Composite is an appropriate performance metric for MVF, and that BlackRock has explained its rationale for this belief to the Board. The Board and BlackRock reviewed MVFs underperformance relative to its Customized Peer
Group Composite during the applicable period.
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C. Consideration of the Advisory/Management Fees and the Estimated Cost of
the Services and Estimated Profits Realized by BlackRock and its Affiliates from their Relationship with each Fund
The Board, including the
Independent Board Members, reviewed each Funds contractual management fee rate compared with those of its Expense Peers. The contractual management fee rate represents a combination of the advisory fee and any administrative fees, before
taking into account any reimbursements or fee waivers. The Board also compared each Funds total expense ratio, as well as its actual management fee rate as a percentage of managed assets, which is the total assets of each Fund (including any
assets attributable to money borrowed for investment purposes) minus the sum of each Funds accrued liabilities (other than money borrowed for investment purposes) to those of its Expense Peers. The total expense ratio represents a funds
total net operating expenses, excluding any investment related expenses. The total expense ratio gives effect to any expense reimbursements or fee waivers, and the actual management fee rate gives effect to any management fee reimbursements or
waivers. The Board considered the services provided and the fees charged by BlackRock and its affiliates to other types of clients with similar investment mandates, as applicable, including institutional accounts and
sub-advised mutual funds (including mutual funds sponsored by third parties).
The Board received and reviewed
statements relating to BlackRocks financial condition. The Board reviewed BlackRocks profitability methodology and was also provided with an estimated profitability analysis that detailed the revenues earned and the expenses incurred by
BlackRock for services provided to each Fund. The Board reviewed BlackRocks estimated profitability with respect to each Fund and other funds the Board currently oversees for the year ended December 31, 2020 compared to available
aggregate estimated profitability data provided for the prior two years. The Board reviewed BlackRocks estimated profitability with respect to certain other U.S. fund complexes managed by the Manager and/or its affiliates. The Board reviewed
BlackRocks assumptions and methodology of allocating expenses in the estimated profitability analysis, noting the inherent limitations in allocating costs among various advisory products. The Board recognized that profitability may be affected
by numerous factors including, among other things, fee waivers and expense reimbursements by the Manager, the types of funds managed, precision of expense allocations and business mix. The Board thus recognized that calculating and comparing
profitability at the individual fund level is difficult.
The Board noted that, in general, individual fund or product line profitability of other
advisors is not publicly available. The Board reviewed BlackRocks overall operating margin, in general, compared to that of certain other publicly traded asset management firms. The Board considered the differences between BlackRock and these
other firms, including the contribution of technology at BlackRock, BlackRocks expense management, and the relative product mix.
The Board
considered whether BlackRock has the financial resources necessary to attract and retain high quality investment management personnel to perform its obligations under the Agreements and to continue to provide the high quality of services that is
expected by the Board. The Board further considered factors including but not limited to BlackRocks commitment of time, assumption of risk, and liability profile in servicing each Fund, including in contrast to what is required of BlackRock
with respect to other products with similar investment mandates across the open-end fund, closed-end fund, sub-advised mutual
fund, collective investment trust, and institutional separate account product channels, as applicable.
The Board noted that BYMs contractual
management fee rate ranked in the first quartile, and that the actual management fee rate and total expense ratio ranked in the second and third quartiles, respectively, relative to the Expense Peers.
The Board noted that BLEs contractual management fee rate ranked in the first quartile, and that the actual management fee rate and total expense
ratio each ranked in the second quartile relative to the Expense Peers.
The Board noted that MFLs contractual management fee rate ranked in the
first quartile, and that the actual management fee rate and total expense ratio ranked in the first and second quartiles, respectively, relative to the Expense Peers.
The Board noted that MVFs contractual management fee rate ranked in the first quartile, and that the actual management fee rate and total expense
ratio each ranked in the first quartile, relative to the Expense Peers.
D. Economies of Scale
The Board, including the Independent Board Members, considered the extent to which economies of scale might be realized as the assets of each Fund
increase. The Board also considered the extent to which each Fund benefits from such economies of scale in a variety of ways, and whether there should be changes in the advisory fee rate or breakpoint structure in order to enable each Fund to more
fully participate in these economies of scale. The Board considered each Funds asset levels and whether the current fee was appropriate.
Based
on the Boards review and consideration of the issue, the Board concluded that most closed-end funds do not have fund level breakpoints because closed-end funds
generally do not experience substantial growth after the initial public offering. Closed-end funds are typically priced at scale at a funds inception.
E. Other Factors Deemed Relevant by the Board Members
The Board, including the Independent Board Members, also took into account other ancillary or fall-out
benefits that BlackRock or its affiliates may derive from BlackRocks respective relationships with each Fund, both tangible and intangible, such as BlackRocks ability to leverage its investment professionals who manage other portfolios
and its risk management personnel, an increase in BlackRocks profile in the investment advisory community, and the engagement of BlackRocks affiliates as service providers to each Fund, including for administrative, securities lending
and cash management services. The Board also considered BlackRocks overall operations and its efforts to expand the scale of, and improve the quality of, its operations. The Board also noted that, subject to applicable law, BlackRock may use
and benefit from third-party research obtained by soft dollars generated by certain registered fund transactions to assist in managing all or a number of its other client accounts.
In connection with its consideration of the Agreements, the Board also received information regarding BlackRocks brokerage and soft dollar
practices. The Board received reports from BlackRock which included information on brokerage commissions and trade execution practices throughout the year.
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The Board noted the competitive nature of the
closed-end fund marketplace, and that shareholders are able to sell their Fund shares in the secondary market if they believe that each Funds fees and expenses are too high or if they are dissatisfied
with the performance of each Fund.
The Board also considered the various notable initiatives and projects BlackRock performed in connection with its closed-end fund product line. These initiatives included developing equity shelf programs; efforts to eliminate product overlap with fund mergers; ongoing services to manage leverage that has become increasingly
complex; periodic evaluation of share repurchases and other support initiatives for certain BlackRock funds; and continued communication efforts with shareholders, fund analysts and financial advisers. With respect to the latter, the Independent
Board Members noted BlackRocks continued commitment to supporting the secondary market for the common shares of its closed-end funds through a comprehensive secondary market communication program
designed to raise investor and analyst awareness and understanding of closed-end funds. BlackRocks support services included, among other things: sponsoring and participating in conferences;
communicating with closed-end fund analysts covering the BlackRock funds throughout the year; providing marketing and product updates for the closed-end funds; and
maintaining and enhancing its closed-end fund website.
Conclusion
The Board, including the Independent Board Members, unanimously approved the continuation of the Advisory Agreements between the Manager and each Fund for
a one-year term ending June 30, 2022. Based upon its evaluation of all of the aforementioned factors in their totality, as well as other information, the Board, including the Independent Board Members,
was satisfied that the terms of the Agreements were fair and reasonable and in the best interest of each Fund and its shareholders. In arriving at its decision to approve the Agreements, the Board did not identify any single factor or group of
factors as all-important or controlling, but considered all factors together, and different Board Members may have attributed different weights to the various factors considered. The Independent Board Members
were also assisted by the advice of independent legal counsel in making this determination.
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Recent Changes
The following information is a summary of certain changes since August 31, 2020. This information may not reflect all of the changes that have
occurred since you purchased the relevant Fund.
During each Funds most recent fiscal year, there were no material changes in the
Funds investment objectives or policies that have not been approved by shareholders or in the principal risk factors associated with investment in the Fund.
Investment Objectives and Policies
BlackRock Municipal Income Quality
Trust (BYM)
The Funds investment objective is to provide current income exempt from federal income taxes, including the alternative minimum
tax. The Funds investment policies provide that, under normal circumstances, the Fund as a fundamental policy will invest at least 80% of its managed assets in securities that pay interest that is, or make other distributions that are, exempt
from federal income tax, including the alternative minimum tax and/or state and local personal taxes, regardless of the technical structure of the issuer of the instrument (Municipal Bonds) that pay interest that is exempt from federal
income tax, including the alternative minimum tax. The Funds investment policies provide that the Fund will not invest in any bond if the interest on that bond is subject to the alternative minimum tax. The Fund cannot change its investment
objectives or its policy of investing 80% of its managed assets in bonds that pay interest that is exempt from federal income tax, including the alternative minimum tax without the approval of the holders of a majority of the outstanding common
shares and the outstanding preferred shares, including the variable rate muni term preferred shares (VMTP Shares), voting together as a single class, and of the holders of a majority of the outstanding preferred shares, including the
VMTP Shares, voting as a separate class. A majority of the outstanding means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50%
of the outstanding shares, whichever is less.
The Fund invests at least 80% of its managed assets in municipal bonds that are investment grade
quality at the time of investment. Investment grade quality means that such bonds are rated, at the time of investment, within the four highest grades (Baa or BBB or better by Moodys Investors Service, Inc. (Moodys), S&P
Global Ratings (S&P), or Fitch Ratings, Inc. (Fitch)) or are unrated but judged to be of comparable quality by BlackRock Advisors, LLC (the Manager). Municipal Bonds rated Baa by Moodys are investment
grade, but Moodys considers Municipal Bonds rated Baa to have speculative characteristics. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity for issuers of Municipal Bonds that are rated BBB
or Baa (or that have equivalent ratings) to make principal and interest payments than is the case for issues of higher grade Municipal Bonds. In the case of short term notes, the investment grade rating categories are
SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating categories are A-1+
through A-3 for S&P, Prime-1 through Prime-3 for Moodys and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys and BBB and F-3 for Fitch), while considered investment grade, may have certain
speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect to the
foregoing requirements, the Manager takes into account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit
enhancement.
The Fund may invest up to 20% of its managed assets in securities that are rated below investment grade, or are considered by the
Manager to be of comparable quality, at the time of purchase, subject to the Funds other investment policies. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the
issuers capacity to pay interest and repay principal. Such securities are sometimes referred to as high yield or junk bonds.
The foregoing credit quality policies apply only at the time a security is purchased, and the Fund is not required to dispose of a security if a rating
agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, the Manager may consider such factors as the Managers assessment of
the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. In the event that the Fund disposes of a portfolio security subsequent to its
being downgraded, the Fund may experience a greater risk of loss than if such security had been sold prior to such downgrade.
The Fund may purchase
Municipal Bonds that are additionally secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance feature
reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce the Funds income. The insurance feature does not guarantee the market value of the insured obligations or the net
asset value of the common shares. The Fund may purchase insured bonds and may purchase insurance for bonds in its portfolio.
The average maturity of
the Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Manager. The Funds portfolio at any given time may include both long-term and intermediate-term Municipal Bonds.
The Funds stated expectation is that it will invest in Municipal Bonds that, in the Managers opinion, are underrated or undervalued.
Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Manager, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Manager, are worth more than the value assigned
to them in the marketplace. The Manager may at times believe that bonds associated with a particular municipal market sector (for example, but not limited to electric utilities), or issued by a particular municipal issuer, are undervalued. The
Manager may purchase those bonds for the Funds portfolio because they represent a market sector or issuer that the Manager considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar
bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market
sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do not apply to the particular Municipal Bonds that are considered undervalued. The Funds investment in underrated or
undervalued Municipal Bonds will be based on the Managers belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and
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that their prices will
ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by the Fund will generally result in capital gain distributions subject to federal capital gains taxation.
The Fund ordinarily does not intend to realize significant investment income not exempt from federal income tax. From time to time, the Fund may realize
taxable capital gains. Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax exemption. As a result, this legislation and legislation that may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
Leverage: The Fund may utilize leverage to seek to enhance the yield and net
asset value of its common shares. However, this objective cannot be achieved in all interest rate environments. The Fund currently leverages its assets through the use of VMTP Shares and residual interest municipal tender option bonds (TOB
Residuals), which are derivative interests in municipal bonds. The TOB Residuals in which the Fund will invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal
income tax.
The Fund may enter into reverse repurchase agreements with respect to its portfolio investments subject to the Funds investment
restrictions.
The Fund reserves the right to borrow funds subject to the Funds investment restrictions. The proceeds of borrowings may be used
for any valid purpose including, without limitation, liquidity, investments and repurchases of shares of the Fund.
BlackRock Municipal Income Trust II (BLE)
The Funds investment objective is to provide current income exempt from regular federal income taxes. As a fundamental policy, under normal
market conditions, the Fund will invest at least 80% of its managed assets in municipal obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities
(Municipal Bonds), the interest of which is exempt from regular federal income tax (except that the interest may be subject to the alternative minimum tax). The Fund cannot change its investment objectives or the foregoing fundamental
policy without the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares, including the variable rate muni term preferred shares (VMTP Shares), voting together as a single class, and
of the holders of a majority of the outstanding preferred shares, including the VMTP Shares, voting as a separate class. A majority of the outstanding means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the
outstanding shares are present or represented by proxy, or (2) more than 50% of the outstanding shares, whichever is less.
The Funds
investment policies provide that, under normal market conditions, the Fund will invest at least 80% of its managed assets in investment grade quality Municipal Bonds. Investment grade quality means that such bonds are rated, at the time of
investment, within the four highest grades (Baa or BBB or better by Moodys Investors Service, Inc. (Moodys), S&P Global Ratings (S&P), or Fitch Ratings, Inc. (Fitch)) or are unrated but judged
to be of comparable quality by BlackRock Advisors, LLC (the Manager). Municipal Bonds rated Baa by Moodys are investment grade, but Moodys considers Municipal Bonds rated Baa to have speculative characteristics. Changes in
economic conditions or other circumstances are more likely to lead to a weakened capacity for issuers of Municipal Bonds that are rated BBB or Baa (or that have equivalent ratings) to make principal and interest payments than is the case for issues
of higher grade Municipal Bonds. In the case of short-term notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the case of tax
exempt commercial paper, the investment grade rating categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moodys and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys and BBB and F-3 for Fitch), while considered investment grade, may have certain speculative characteristics. There may be sub-categories or gradations indicating relative
standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect to the foregoing requirements, the Manager takes into account the nature of any letters of credit or similar credit enhancement to which
particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit enhancement.
The Fund may
invest up to 20% of its managed assets in Municipal Bonds that are rated, at the time of investment, Ba/BB or B by Moodys, S&P or Fitch or that are unrated but judged to be of comparable quality by the Manager. Bonds of below investment
grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Such securities are sometimes referred to as high yield or junk
bonds.
The foregoing credit quality policies apply only at the time a security is purchased, and the Fund is not required to dispose of a security if
a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, the Manager may consider such factors as the Managers
assessment of the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. In the event that the Fund disposes of a portfolio security
subsequent to its being downgraded, the Fund may experience a greater risk of loss than if such security had been sold prior to such downgrade.
The
Fund may also invest in securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds of the types in which the Fund may invest directly and in tax-exempt preferred shares that pay dividends that are exempt from regular federal income tax. In addition, the Fund may purchase Municipal Bonds that are additionally secured by insurance, bank credit agreements
or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the premiums for insurance and the higher market
price paid for insured obligations may reduce the Funds income. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the common shares. The Fund may purchase insured bonds and may
purchase insurance for bonds in its portfolio.
The Fund may invest in certain tax exempt securities classified as private activity bonds
(or industrial development bonds, under pre-1986 law) (in general, bonds that benefit non-governmental entities) that may subject certain investors in the Fund to an
alternative minimum tax. The percentage of the Funds total assets invested in private activity bonds will vary from time to time. The Fund has not established any limit on the percentage of its portfolio that may be invested in Municipal Bonds
subject to the alternative minimum tax provisions of federal tax law, and the Fund expects that a portion of the income it produces will be includable in alternative minimum taxable income. VMTP Shares therefore would not ordinarily be a suitable
investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing VMTP Shares. The suitability of an investment in VMTP Shares will depend upon a comparison of the after-tax yield likely to be provided from the Fund with that
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Investment Objectives, Policies and Risks (continued)
from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investors tax position. Special considerations may apply to corporate
investors.
The average maturity of the Funds portfolio securities varies from time to time based upon an assessment of economic and market
conditions by the Manager. The Funds portfolio at any given time may include both long- term and intermediate-term Municipal Bonds.
The
Funds stated expectation is that it will invest in Municipal Bonds that, in the Managers opinion, are underrated or undervalued. Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Manager, reflect their true
higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Manager, are worth more than the value assigned to them in the marketplace. The Manager may at times believe that bonds associated with a particular municipal
market sector (for example, but not limited to electric utilities), or issued by a particular municipal issuer, are undervalued. The Manager may purchase those bonds for the Funds portfolio because they represent a market sector or issuer that
the Manager considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or
bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do
not apply to the particular Municipal Bonds that are considered undervalued. The Funds investment in underrated or undervalued Municipal Bonds will be based on the Managers belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by the Fund will generally
result in capital gain distributions subject to federal capital gains taxation.
The Fund ordinarily does not intend to realize significant investment
income not exempt from federal income tax. From time to time, the Fund may realize taxable capital gains.
Federal tax legislation has limited the
types and volume of bonds the interest on which qualifies for a federal income tax exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by the Fund.
Leverage: The Fund may utilize leverage to seek to enhance the yield and net asset value of its common shares. However, this objective cannot
be achieved in all interest rate environments. The Fund currently leverages its assets through the use of VMTP Shares and residual interest municipal tender option bonds (TOB Residuals), which are derivative interests in municipal bonds.
The TOB Residuals in which the Fund will invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax.
The Fund may enter into reverse repurchase agreements with respect to its portfolio investments subject to the Funds investment restrictions.
The Fund reserves the right to borrow funds subject to the Funds investment restrictions. The proceeds of borrowings may be used for any valid
purpose including, without limitation, liquidity, investments and repurchases of shares of the Fund.
BlackRock MuniHoldings Investment Quality Fund (MFL)
The Fund seeks as a fundamental investment objective to provide shareholders with current income exempt from federal income tax and to provide
shareholders with the opportunity to own shares the value of which is exempt from Florida intangible personal property tax. The investment objective of the Fund is a fundamental policy that may not be changed without a vote of a majority of the
Funds outstanding voting securities.
The Fund seeks to achieve its investment objective by investing primarily in a portfolio of long-term,
investment grade municipal obligations, the interest on which, in the opinion of bond counsel to the issuer, is exempt from federal income tax (Municipal Bonds). At all times, at least 80% of the Funds total assets is invested in
Municipal Bonds, except during interim periods pending investment of the net proceeds of public offerings of its securities and during temporary defensive periods. At times, the Fund may seek to hedge its portfolio through the use of futures and
options transactions to reduce volatility in the net asset value of its Common Shares. Under normal circumstances, at least 80% of the Funds total assets will be invested in municipal obligations with remaining maturities of one year or more.
The Fund may invest directly in such securities or synthetically through the use of derivatives. There can be no assurance that the Funds investment objective will be realized.
The Fund may invest in certain tax-exempt securities classified as private activity bonds (or
industrial development bonds, under pre-1986 law) (PABs) (in general, bonds that benefit nongovernmental entities) that may subject certain investors in the Fund to an alternative minimum tax. The
percentage of the Funds total assets invested in PABs will vary from time to time.
The investment grade Municipal Bonds in which the Fund will
primarily invest are those Municipal Bonds that are rated at the date of purchase in the four highest rating categories of Moodys Investors Service, Inc. (Moodys), S&P Global Ratings (S&P), or Fitch
Ratings, Inc. (Fitch) or, if unrated, are considered to be of comparable quality by BlackRock Advisors, LLC (the Manager). In the case of long-term debt, the investment grade rating categories are AAA through BBB for S&P
and Fitch and Aaa through Baa for Moodys. In the case of short-term notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the case of tax-exempt commercial paper, the investment grade rating categories are A-1+ through A-3 for S&P, Prime-I through Prime-3 for Moodys and F-1+ through F-3 for Fitch. Obligations
ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys; and BBB and F-3 for Fitch), while considered investment grade, may have certain speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect to the foregoing requirements, the Manager takes into
account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit enhancements.
The Fund may invest up to 20% of its managed assets in securities that are rated below investment grade, or are considered by the Manager to be of
comparable quality, at the time of purchase, subject to the Funds other investment policies. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to
pay interest and repay principal. Such securities are sometimes referred to as high yield or junk bonds.
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All percentage and ratings
limitations on securities in which the Fund may invest apply at the time of making an investment and shall not be considered violated if an investment rating is subsequently downgraded to a rating that would have precluded the Funds initial
investment in such security. In the event that the Fund disposes of a portfolio security subsequent to its being downgraded, the Fund may experience a greater risk of loss than if such security had been sold prior to such downgrade.
The Fund intends to invest primarily in long-term Municipal Bonds with maturities of more than ten years. However, the Fund also may invest in
intermediate term Municipal Bonds with maturities of between three years and ten years. The Fund also may invest from time to time in short-term Municipal Bonds with maturities of less than three years. The average maturity of the Funds
portfolio securities will vary based upon the Managers assessment of economic and market conditions.
The Fund may invest in short-term, tax-exempt securities, short-term U.S. Government securities, repurchase agreements or cash. Such short-term securities or cash will not exceed 20% of its total assets except during interim periods pending
investment of the net proceeds of public offerings of the Funds securities or in anticipation of the repurchase or redemption of the Funds securities and temporary periods when, in the opinion of the Manager, prevailing market or
financial conditions warrant. The Fund also may invest in variable rate demand obligations (VRDOs) and VRDOs in the form of participation interests (Participating VRDOs) in variable rate
tax-exempt obligations held by a financial institution. The Funds hedging strategies are not fundamental policies and may be modified by the Board of Directors of the Fund without the approval of the
Funds stockholders. The Fund is also authorized to invest in indexed and inverse floating rate obligations for hedging purposes and to seek to enhance return.
The Fund may invest in securities not issued by or on behalf of a state or territory or by an agency or instrumentality thereof, if the Fund nevertheless
believes such securities pay interest that is excludable from gross income for federal income tax purposes (Non-Municipal Tax-Exempt Securities). Non-Municipal Tax-Exempt Securities could include trust certificates, partnership interests or other instruments evidencing interest in one or more long-term Municipal Bonds. Non-Municipal Tax-Exempt Securities also may include securities issued by other investment companies that invest in Municipal Bonds, to the extent such investments are
permitted by the Funds investment restrictions and applicable law, including the 1940 Act. Non-Municipal Tax-Exempt Securities are subject to the same risks
associated with an investment in Municipal Bonds as well as many of the risks associated with investments in derivatives. For purposes of the Funds investment objective and policies, Non-Municipal Tax-Exempt Securities that pay interest that is exempt from federal income taxes will be considered Municipal Bonds.
The Fund ordinarily does not intend to realize significant investment income not exempt from federal income tax. From time to time, the Fund may realize
taxable capital gains.
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax-exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by the Fund.
The State of Florida repealed the Florida Intangible Tax as of January 2007. As a result, on September 12, 2008, the Board of Trustees of the Fund
voted unanimously to approve the Fund investing in Municipal Bonds regardless of geographic location. If Florida were to reinstate the Florida Intangible Tax or adopt a state income tax, however, the Fund would be required to realign its portfolio
such that at substantially all of its assets would be invested in Florida Municipal Bonds or obtain shareholder approval to amend the Funds fundamental investment objective to remove references to the Florida Intangible Tax. There can be no
assurance that the State of Florida will not reinstate the Florida Intangible Tax or adopt a state income tax in the future. There can also be no assurance that the reinstatement of the Florida Intangible Tax or the adoption of a state income tax
will not have a material adverse effect on the Fund or will not impair the ability of the Fund to achieve its investment objectives.
Leverage:
The Fund may utilize leverage to seek to enhance the yield and net asset value of its common shares. However, this objective cannot be achieved in all interest rate environments. The Fund currently leverages its assets through the use of
variable rate demand preferred shares (VRDP Shares) and residual interest municipal tender option bonds (TOB Residuals), which are derivative interests in municipal bonds. The TOB Residuals in which the Fund will invest pay
interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax.
The Fund may
enter into reverse repurchase agreements with respect to its portfolio investments subject to the Funds investment restrictions.
The Fund is
authorized to borrow money in amounts of up to 5% of the value of its total assets at the time of such borrowings; provided, however, that the Fund is authorized to borrow moneys in amounts of up to 33 1/3% of the value of its total assets at the
time of such borrowings to finance the repurchase of its own common shares pursuant to tender offers or otherwise to redeem or repurchase preferred shares.
BlackRock MuniVest Fund, Inc. (MVF)
The Funds
investment objective is to provide shareholders with as high a level of current income exempt from federal income taxes as is consistent with its investment policies and prudent investment management. The Funds investment policies provide that
it seeks to achieve its investment objective by investing, as a fundamental policy, at least 80% of an aggregate of the Funds net assets (including proceeds from the issuance of any preferred stock) and the proceeds of any borrowings for
investment purposes, in a portfolio of municipal obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities, each of which pays interest that, in the
opinion of bond counsel to the issuer, is excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the alternative minimum tax) (Municipal Bonds).
The Funds investment objective and its policy of investing at least 80% of an aggregate of the Funds net assets (including proceeds from the
issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in Municipal Bonds are fundamental policies that may not be changed without the approval of the holders of a majority of the outstanding common shares and
the outstanding preferred shares, including the variable rate muni term preferred shares (VMTP Shares), voting together as a single class, and of the holders of a majority of the outstanding preferred shares, including the VMTP Shares,
voting as a separate class. A majority of the outstanding means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50% of the
outstanding shares, whichever is less.
The Funds investment policies provide that, under normal market conditions, the Fund will invest
primarily in a portfolio of long term Municipal Bonds that are commonly referred to as investment grade securities, which are obligations rated at the time of purchase within the four highest quality ratings as determined by either
Moodys Investors Service, Inc. (Moodys) (currently Aaa, Aa, A and Baa), S&P Global Ratings (S&P) (currently AAA, AA, A and BBB) or Fitch Ratings (Fitch) (currently AAA, AA, A and BBB).
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Investment Objectives, Policies and Risks (continued)
In the case of short-term
notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating
categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for
Moodys and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2
and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys and BBB and F-3 for Fitch),
while considered investment grade, may have certain speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above.
In assessing the quality of Municipal Bonds with respect to the foregoing requirements, BlackRock Advisors, LLC (the Manager) takes into account the nature of any letters of credit or similar credit enhancement to which particular
Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit enhancement. If unrated, such securities will possess creditworthiness comparable, in the opinion of the Manager, to other obligations in
which the Fund may invest.
The foregoing credit quality policies apply only at the time a security is purchased, and the Fund is not required to
dispose of a security if a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, the Manager may consider such factors as
the Managers assessment of the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. In the event that the Fund disposes of a
portfolio security subsequent to its being downgraded, the Fund may experience a greater risk of loss than if such security had been sold prior to such downgrade.
The Fund may invest up to 20% of its total assets in securities rated below investment grade at time of purchase, or deemed equivalent. Bonds of below
investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Such securities are sometimes referred to as high yield or
junk bonds.
The Fund may also purchase Municipal Bonds that are additionally secured by insurance, bank credit agreements or escrow
accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the premiums for insurance and the higher market price paid
for insured obligations may reduce the Funds income. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the common shares. The Fund may purchase insured bonds and may purchase
insurance for bonds in its portfolio.
The Fund may invest in certain tax exempt securities classified as private activity bonds (or
industrial development bonds, under pre-1986 law) (PABs) (in general, bonds that benefit non-governmental entities) that may subject certain investors in the
Fund to an alternative minimum tax. The percentage of the Funds total assets invested in PABs will vary from time to time. The Fund has not established any limit on the percentage of its portfolio that may be invested in Municipal Bonds
subject to the federal alternative minimum tax provisions of federal tax law, and the Fund expects that a portion of the income it produces will be includable in alternative minimum taxable income. VMTP Shares therefore would not ordinarily be a
suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing VMTP Shares. The suitability of an investment in VMTP Shares will depend upon a comparison of the after-tax yield likely to be provided from the Fund with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully
taxable investments, in light of each such investors tax position. Special considerations may apply to corporate investors.
The Fund also may
not invest more than 25% of its total assets (taken at market value at the time of each investment) in Municipal Bonds whose issuers are located in the same state.
The average maturity of the Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions by the
Manager. The Funds portfolio at any given time may include long-term, intermediate-term and short-term Municipal Bonds.
The Funds stated
expectation is that it will invest in Municipal Bonds that, in the Managers opinion, are underrated or undervalued. Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Manager, reflect their true higher
creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Manager, are worth more than the value assigned to them in the marketplace. The Manager may at times believe that bonds associated with a particular municipal market
sector (for example, but not limited to electric utilities), or issued by a particular municipal issuer, are undervalued. The Manager may purchase those bonds for the Funds portfolio because they represent a market sector or issuer that the
Manager considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or
bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do
not apply to the particular Municipal Bonds that are considered undervalued. The Funds investment in underrated or undervalued Municipal Bonds will be based on the Managers belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by the Fund will generally
result in capital gain distributions subject to federal capital gains taxation.
The Fund ordinarily does not intend to realize significant investment
income not exempt from federal income tax. From time to time, the Fund may realize taxable capital gains.
Federal tax legislation has limited the
types and volume of bonds the interest on which qualifies for a federal income tax exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by the Fund.
Leverage: The Fund may utilize leverage to seek to enhance the yield and net asset value of its common shares. However, this objective cannot
be achieved in all interest rate environments. The Fund currently leverages its assets through the use of VMTP Shares and residual interest municipal tender option bonds (TOB Residuals), which are derivative interests in municipal bonds.
The TOB Residuals in which the Fund will invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax.
The Fund may enter into reverse repurchase agreements with respect to its portfolio investments subject to the Funds investment restrictions.
The Fund is authorized to borrow money in amounts of up to 5% of the value of its total assets at the time of such borrowings.
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Risk Factors
This section contains a discussion of the general risks of investing in each Fund. The net asset value and market price of, and dividends paid on, the
common shares will fluctuate with and be affected by, among other things, the risks more fully described below. As with any fund, there can be no guarantee that a Fund will meet its investment objective or that the Funds performance will be
positive for any period of time. Each risk noted below is applicable to each Fund unless the specific Fund or Funds are noted in a parenthetical.
Investment and Market Discount Risk: An investment in the Funds common shares is subject to investment risk, including the possible loss of
the entire amount that you invest. As with any stock, the price of the Funds common shares will fluctuate with market conditions and other factors. If shares are sold, the price received may be more or less than the original investment. Common
shares are designed for long-term investors and the Fund should not be treated as a trading vehicle. Shares of closed-end management investment companies frequently trade at a discount from their net asset
value. This risk is separate and distinct from the risk that the Funds net asset value could decrease as a result of its investment activities. At any point in time an investment in the Funds common shares may be worth less than the
original amount invested, even after taking into account distributions paid by the Fund. During periods in which the Fund may use leverage, the Funds investment, market discount and certain other risks will be magnified.
Debt Securities Risk: Debt securities, such as bonds, involve interest rate risk, credit risk, extension risk, and prepayment risk, among other
things.
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Interest Rate Risk The market value of bonds and other fixed-income securities changes in response to interest
rate changes and other factors. Interest rate risk is the risk that prices of bonds and other fixed-income securities will increase as interest rates fall and decrease as interest rates rise.
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The Fund may be subject to a greater risk of rising interest rates due to the current period of historically low rates. For example, if
interest rates increase by 1%, assuming a current portfolio duration of ten years, and all other factors being equal, the value of the Funds investments would be expected to decrease by 10%. The magnitude of these fluctuations in the market
price of bonds and other fixed-income securities is generally greater for those securities with longer maturities. Fluctuations in the market price of the Funds investments will not affect interest income derived from instruments already owned
by the Fund, but will be reflected in the Funds net asset value. The Fund may lose money if short-term or long-term interest rates rise sharply in a manner not anticipated by Fund management.
To the extent the Fund invests in debt securities that may be prepaid at the option of the obligor (such as mortgage-backed securities),
the sensitivity of such securities to changes in interest rates may increase (to the detriment of the Fund) when interest rates rise. Moreover, because rates on certain floating rate debt securities typically reset only periodically, changes in
prevailing interest rates (and particularly sudden and significant changes) can be expected to cause some fluctuations in the net asset value of the Fund to the extent that it invests in floating rate debt securities.
These basic principles of bond prices also apply to U.S. Government securities. A security backed by the full faith and credit
of the U.S. Government is guaranteed only as to its stated interest rate and face value at maturity, not its current market price. Just like other fixed-income securities, government-guaranteed securities will fluctuate in value when interest rates
change.
A general rise in interest rates has the potential to cause investors to move out of fixed-income securities on a large
scale, which may increase redemptions from funds that hold large amounts of fixed-income securities. Heavy redemptions could cause the Fund to sell assets at inopportune times or at a loss or depressed value and could hurt the Funds
performance.
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Credit Risk Credit risk refers to the possibility that the issuer of a debt security (i.e., the borrower) will not
be able to make payments of interest and principal when due. Changes in an issuers credit rating or the markets perception of an issuers creditworthiness may also affect the value of the Funds investment in that issuer. The
degree of credit risk depends on both the financial condition of the issuer and the terms of the obligation.
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Extension Risk When interest rates rise, certain obligations will be paid off by the obligor more slowly than
anticipated, causing the value of these obligations to fall.
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Prepayment Risk When interest rates fall, certain obligations will be paid off by the obligor more quickly than
originally anticipated, and the Fund may have to invest the proceeds in securities with lower yields.
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Municipal Securities
Risks: Municipal securities risks include the ability of the issuer to repay the obligation, the relative lack of information about certain issuers of municipal securities, and the possibility of future legislative changes which could affect the
market for and value of municipal securities. These risks include:
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General Obligation Bonds Risks Timely payments depend on the issuers credit quality, ability to raise tax
revenues and ability to maintain an adequate tax base.
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Revenue Bonds Risks These payments depend on the money earned by the particular facility or class of facilities,
or the amount of revenues derived from another source.
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Private Activity Bonds Risks Municipalities and other public authorities issue private activity bonds to finance
development of industrial facilities for use by a private enterprise. The private enterprise pays the principal and interest on the bond, and the issuer does not pledge its full faith, credit and taxing power for repayment. The Funds
investments may consist of private activity bonds that may subject certain shareholders to an alternative minimum tax.
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Moral Obligation Bonds Risks Moral obligation bonds are generally issued by special purpose public authorities of
a state or municipality. If the issuer is unable to meet its obligations, repayment of these bonds becomes a moral commitment, but not a legal obligation, of the state or municipality.
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Municipal Notes Risks Municipal notes are shorter term municipal debt obligations. If there is a shortfall in the
anticipated proceeds, the notes may not be fully repaid and the Fund may lose money.
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Investment Objectives, Policies and Risks (continued)
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Municipal Lease Obligations Risks In a municipal lease obligation, the issuer agrees to make payments when due on
the lease obligation. Although the issuer does not pledge its unlimited taxing power for payment of the lease obligation, the lease obligation is secured by the leased property.
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Tax-Exempt Status Risk The Fund and its investment manager will rely on
the opinion of issuers bond counsel and, in the case of derivative securities, sponsors counsel, on the tax-exempt status of interest on municipal bonds and payments under derivative securities.
Neither the Fund nor its investment manager will independently review the bases for those tax opinions, which may ultimately be determined to be incorrect and subject the Fund and its shareholders to substantial tax liabilities.
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Taxability Risk: The Fund intends to minimize the payment of taxable income to shareholders by investing in tax-exempt or municipal securities in reliance at the time of purchase on an opinion of bond counsel to the issuer that the interest paid on those securities will be excludable from gross income for U.S. federal
income tax purposes. Such securities, however, may be determined to pay, or have paid, taxable income subsequent to the Funds acquisition of the securities. In that event, the Internal Revenue Service may demand that the Fund pay U.S. federal
income taxes on the affected interest income, and, if the Fund agrees to do so, the Funds yield could be adversely affected. In addition, the treatment of dividends previously paid or to be paid by the Fund as exempt interest
dividends could be adversely affected, subjecting the Funds shareholders to increased U.S. federal income tax liabilities. Federal tax legislation may limit the types and volume of bonds the interest on which qualifies for a federal
income tax-exemption. As a result, current legislation and legislation that may be enacted in the future may affect the availability of municipal bonds for investment by the Fund. In addition, future laws,
regulations, rulings or court decisions may cause interest on municipal securities to be subject, directly or indirectly, to U.S. federal income taxation or exempt interest on state municipal securities that are currently exempt to be subject to
state or local income taxation, or the value of state municipal securities to be subject to state or local intangible personal property tax, or may otherwise prevent the Fund from realizing the full current benefit of the tax-exempt status of such securities. Any such change could also affect the market price of such securities, and thus the value of an investment in the Fund.
Insurance Risk: Insurance guarantees that interest payments on a municipal security will be made on time and that the principal will be repaid when
the security matures. However, insurance does not protect against losses caused by declines in a municipal securitys value. The Fund cannot be certain that any insurance company will make the payments it guarantees. If a municipal
securitys insurer fails to fulfill its obligations or loses its credit rating, the value of the security could drop.
Junk Bonds Risk:
Although junk bonds generally pay higher rates of interest than investment grade bonds, junk bonds are high risk investments that are considered speculative and may cause income and principal losses for the Fund.
U.S. Government Obligations Risk: Certain securities in which the Fund may invest, including securities issued by certain U.S. Government agencies
and U.S. Government sponsored enterprises, are not guaranteed by the U.S. Government or supported by the full faith and credit of the United States.
Variable Rate Demand Obligations Risks (MFL): Variable rate demand obligations are floating rate securities that combine an interest in a long term
municipal bond with a right to demand payment before maturity from a bank or other financial institution. If the bank or financial institution is unable to pay, the Fund may lose money.
Repurchase Agreements and Purchase and Sale Contracts Risk (MFL): If the other party to a repurchase agreement or purchase and sale contract
defaults on its obligation under the agreement, the Fund may suffer delays and incur costs or lose money in exercising its rights under the agreement. If the seller fails to repurchase the security in either situation and the market value of the
security declines, the Fund may lose money.
Leverage Risk: : The Fund uses leverage for investment purposes through the issuance of VMTP
Shares or VRDP Shares, as applicable. The Fund also utilizes leverage for investment purposes by entering into reverse repurchase agreements, derivative instruments with leverage embedded in then, such as TOB Residuals. The Funds use of
leverage may increase or decrease from time to time in its discretion and the Fund may, in the future, determine not to use leverage.
The use of
leverage creates an opportunity for increased common share net investment income dividends, but also creates risks for the holders of common shares. The Fund cannot assure you that the use of leverage will result in a higher yield on the common
shares. Any leveraging strategy the Fund employs may not be successful.
Leverage involves risks and special considerations for common shareholders,
including:
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the likelihood of greater volatility of net asset value, market price and dividend rate of the common shares than a
comparable portfolio without leverage;
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the risk that fluctuations in interest rates or dividend rates on any leverage that the Fund must pay will reduce the
return to the common shareholders;
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the effect of leverage in a declining market, which is likely to cause a greater decline in the net asset value of the
common shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the common shares;
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leverage may increase operating costs, which may reduce total return.
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Any decline in the net asset value of the Funds investments will be borne entirely by the holders of common shares. Therefore, if the market value
of the Funds portfolio declines, leverage will result in a greater decrease in net asset value to the holders of common shares than if the Fund were not leveraged. This greater net asset value decrease will also tend to cause a greater decline
in the market price for the common shares.
Tender Option Bonds Risk: The Funds participation in tender option bond transactions may
reduce the Funds returns and/or increase volatility. Investments in tender option bond transactions expose the Fund to counterparty risk and leverage risk. An investment in a tender option bond transaction typically will involve greater risk
than an investment in a municipal fixed rate security, including the risk of loss of principal. Distributions on TOB Residuals will bear an inverse relationship to short-term municipal security interest rates. Distributions on TOB Residuals paid to
the Fund will be reduced or, in the extreme, eliminated as short-term municipal interest rates rise and will increase when short-term municipal interest rates fall. TOB Residuals generally will underperform the market for fixed rate municipal
securities in a rising interest rate environment. The Fund may invest special purpose trusts formed for the purpose of holding municipal bonds contributed by one or more funds (TOB Trusts) on either a
non-recourse or recourse basis. If the Fund invests in a TOB Trust on a recourse basis, it could suffer losses in excess of the value of its TOB Residuals.
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Reverse Repurchase
Agreements Risk: Reverse repurchase agreements involve the sale of securities held by the Fund with an agreement to repurchase the securities at an agreed-upon price, date and interest payment. Reverse repurchase agreements involve the risk that
the other party may fail to return the securities in a timely manner or at all. The Fund could lose money if it is unable to recover the securities and the value of the collateral held by the Fund, including the value of the investments made with
cash collateral, is less than the value of the securities. These events could also trigger adverse tax consequences for the Fund. In addition, reverse repurchase agreements involve the risk that the interest income earned in the investment of the
proceeds will be less than the interest expense.
Illiquid Investments Risk: The Fund may invest without limitation in illiquid or less liquid
investments or investments in which no secondary market is readily available or which are otherwise illiquid, including private placement securities. The Fund may not be able to readily dispose of such investments at prices that approximate those at
which the Fund could sell such investments if they were more widely traded and, as a result of such illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations.
Limited liquidity can also affect the market price of investments, thereby adversely affecting the Funds net asset value and ability to make dividend distributions. The financial markets in general, and certain segments of the mortgage-related
securities markets in particular, have in recent years experienced periods of extreme secondary market supply and demand imbalance, resulting in a loss of liquidity during which market prices were suddenly and substantially below traditional
measures of intrinsic value. During such periods, some investments could be sold only at arbitrary prices and with substantial losses. Periods of such market dislocation may occur again at any time. Privately issued debt securities are often of
below investment grade quality, frequently are unrated and present many of the same risks as investing in below investment grade public debt securities.
Investment Companies and ETFs Risk (BLE and MFL): Subject to the limitations set forth in the Investment Company Act of 1940, as amended (the
1940 Act), or as otherwise limited by the SEC, the Fund may acquire shares in other investment companies and in exchange-traded funds (ETFs), some of which may be affiliated investment companies. The market value of the
shares of other investment companies and ETFs may differ from their net asset value. As an investor in investment companies and ETFs, the Fund would bear its ratable share of that entitys expenses, including its investment advisory and
administration fees, while continuing to pay its own advisory and administration fees and other expenses (to the extent not offset by the Manager through waivers). As a result, shareholders will be absorbing duplicate levels of fees with respect to
investments in other investment companies and ETFs (to the extent not offset by the Manager through waivers).
The securities of other investment
companies and ETFs in which the Fund may invest may be leveraged. As a result, the Fund may be indirectly exposed to leverage through an investment in such securities. An investment in securities of other investment companies and ETFs that use
leverage may expose the Fund to higher volatility in the market value of such securities and the possibility that the Funds long-term returns on such securities (and, indirectly, the long-term returns of shares of the Fund) will be diminished.
As with other investments, investments in other investment companies, including ETFs, are subject to market and selection risk. To the extent the
Fund is held by an affiliated fund, the ability of the Fund itself to hold other investment companies may be limited.
Derivatives Risk: The
Funds use of derivatives may increase its costs, reduce the Funds returns and/or increase volatility. Derivatives involve significant risks, including:
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Volatility Risk Volatility is defined as the characteristic of a security, an index or a market to fluctuate
significantly in price within a short time period. A risk of the Funds use of derivatives is that the fluctuations in their values may not correlate with the overall securities markets.
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Counterparty Risk Derivatives are also subject to counterparty risk, which is the risk that the other party in the
transaction will not fulfill its contractual obligation.
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Market and Illiquidity Risk The possible lack of a liquid secondary market for derivatives and the resulting
inability of the Fund to sell or otherwise close a derivatives position could expose the Fund to losses and could make derivatives more difficult for the Fund to value accurately.
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Valuation Risk Valuation may be more difficult in times of market turmoil since many investors and market makers
may be reluctant to purchase complex instruments or quote prices for them.
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Hedging Risk Hedges are sometimes subject to imperfect matching between the derivative and the underlying
security, and there can be no assurance that the Funds hedging transactions will be effective. The use of hedging may result in certain adverse tax consequences.
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Tax Risk Certain aspects of the tax treatment of derivative instruments, including swap agreements and
commodity-linked derivative instruments, are currently unclear and may be affected by changes in legislation, regulations or other legally binding authority. Such treatment may be less favorable than that given to a direct investment in an
underlying asset and may adversely affect the timing, character and amount of income the Fund realizes from its investments.
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Regulatory Risk Derivative contracts, including, without limitation, swaps, currency forwards and non-deliverable forwards, are subject to regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) in the United States and under comparable regimes in Europe,
Asia and other non-U.S. jurisdictions. Under the Dodd-Frank Act, certain derivatives are subject to margin requirements and swap dealers are required to collect margin from the Fund with respect to such
derivatives. Specifically, regulations are now in effect that require swap dealers to post and collect variation margin (comprised of specified liquid instruments and subject to a required haircut) in connection with trading of OTC swaps with the
Fund. Shares of investment companies (other than certain money market funds) may not be posted as collateral under these regulations. Requirements for posting of initial margin in connection with OTC swaps will be
phased-in through at least 2021. In addition, regulations adopted by global prudential regulators that are now in effect require certain bank-regulated counterparties and certain of their affiliates to include
in certain financial contracts, including many derivatives contracts, terms that delay or restrict the rights of counterparties, such as the Fund, to terminate such contracts, foreclose upon collateral, exercise other default rights or restrict
transfers of credit support in the event that the counterparty and/or its affiliates are subject to certain types of resolution or insolvency proceedings. The implementation of these requirements with respect to derivatives, as well as regulations
under the Dodd-Frank Act regarding clearing, mandatory trading and margining of other derivatives, may increase the costs and risks to the Fund of trading in these instruments and, as a result, may affect returns to investors in the Fund.
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On October 28, 2020, the SEC adopted new regulations governing the use of derivatives by registered investment
companies (Rule 18f-4). The Fund will be required to implement and comply with Rule 18f-4 by August 19, 2022. Once implemented, Rule 18f-4 will impose limits on the amount of derivatives a fund can enter into,
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Investment Objectives, Policies and Risks (continued)
eliminate
the asset segregation framework currently used by funds to comply with Section 18 of the 1940 Act, treat derivatives as senior securities and require funds whose use of derivatives is more than a limited specified exposure amount to establish
and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager.
Market Risk and Selection Risk:
Market risk is the risk that one or more markets in which the Fund invests will go down in value, including the possibility that the markets will go down sharply and unpredictably. The value of a security or other asset may decline due to
changes in general market conditions, economic trends or events that are not specifically related to the issuer of the security or other asset, or factors that affect a particular issuer or issuers, exchange, country, group of countries, region,
market, industry, group of industries, sector or asset class. Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issues like pandemics or epidemics, recessions, or other events
could have a significant impact on the Fund and its investments. Selection risk is the risk that the securities selected by Fund management will underperform the markets, the relevant indices or the securities selected by other funds with similar
investment objectives and investment strategies. This means you may lose money.
A recent outbreak of an infectious coronavirus has developed into a
global pandemic that has resulted in numerous disruptions in the market and has had significant economic impact leaving general concern and uncertainty. The impact of this coronavirus, and other epidemics and pandemics that may arise in the future,
could affect the economies of many nations, individual companies and the market in general ways that cannot necessarily be foreseen at the present time.
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I N V E S T M E N T O B J E C T I V E S
, P O L I C I E S A N D R I S K S
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Automatic Dividend Reinvestment Plan
Pursuant to BYM, BLE, MFL and MVFs Dividend Reinvestment Plan (the
Reinvestment Plan), Common Shareholders are automatically enrolled to have all distributions of dividends and capital gains and other distributions reinvested by Computershare Trust Company, N.A. (the Reinvestment Plan Agent)
in the respective Trusts Common Shares pursuant to the Reinvestment Plan. Shareholders who do not participate in the Reinvestment Plan will receive all distributions in cash paid by check and mailed directly to the shareholders of record (or
if the shares are held in street name or other nominee name, then to the nominee) by the Reinvestment Plan Agent, which serves as agent for the shareholders in administering the Reinvestment Plan.
After BYM, BLE, MFL and MVF declare a dividend or determine to make a capital gain or other distribution, the Reinvestment Plan Agent will acquire shares
for the participants accounts, depending upon the following circumstances, either (i) through receipt of unissued but authorized shares from the Trusts (newly issued shares) or (ii) by purchase of outstanding shares on
the open market or on the Trusts primary exchange (open-market purchases). If, on the dividend payment date, the net asset value (NAV) per share is equal to or less than the market price per share plus estimated
brokerage commissions (such condition often referred to as a market premium), the Reinvestment Plan Agent will invest the dividend amount in newly issued shares acquired on behalf of the participants. The number of newly issued shares to
be credited to each participants account will be determined by dividing the dollar amount of the dividend by the NAV on the date the shares are issued. However, if the NAV is less than 95% of the market price on the dividend payment date, the
dollar amount of the dividend will be divided by 95% of the market price on the dividend payment date. If, on the dividend payment date, the NAV is greater than the market price per share plus estimated brokerage commissions (such condition often
referred to as a market discount), the Reinvestment Plan Agent will invest the dividend amount in shares acquired on behalf of the participants in open-market purchases. If the Reinvestment Plan Agent is unable to invest the full
dividend amount in open-market purchases, or if the market discount shifts to a market premium during the purchase period, the Reinvestment Plan Agent will invest any un-invested portion in newly issued
shares. Investments in newly issued shares made in this manner would be made pursuant to the same process described above and the date of issue for such newly issued shares will substitute for the dividend payment date.
You may elect not to participate in the Reinvestment Plan and to receive all dividends in cash by contacting the Reinvestment Plan Agent, at the address
set forth below.
Participation in the Reinvestment Plan is completely voluntary and may be terminated or resumed at any time without penalty by
notice if received and processed by the Reinvestment Plan Agent prior to the dividend record date. Additionally, the Reinvestment Plan Agent seeks to process notices received after the record date but prior to the payable date and such notices often
will become effective by the payable date. Where late notices are not processed by the applicable payable date, such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution.
The Reinvestment Plan Agents fees for the handling of the reinvestment of distributions will be paid by each Trust. However, each participant will
pay a pro rata share of brokerage commissions incurred with respect to the Reinvestment Plan Agents open-market purchases in connection with the reinvestment of all distributions. The automatic reinvestment of all distributions will not
relieve participants of any U.S. federal, state or local income tax that may be payable on such dividends or distributions.
Each Trust reserves the
right to amend or terminate the Reinvestment Plan. There is no direct service charge to participants in the Reinvestment Plan; however, each Trust reserves the right to amend the Reinvestment Plan to include a service charge payable by the
participants. Participants in BYM and BLE that request a sale of shares are subject to a $2.50 sales fee and a $0.15 per share sold brokerage commission fee. Participants in MFL and MVF that request a sale of shares are subject to a $0.02 per share
sold brokerage commission. All correspondence concerning the Reinvestment Plan should be directed to Computershare Trust Company, N.A. through the internet at computershare.com/blackrock, or in writing to Computershare, P.O. Box 505000, Louisville,
KY 40233, Telephone: (800) 699-1236. Overnight correspondence should be directed to the Reinvestment Plan Agent at Computershare, 462 South 4th Street, Suite 1600, Louisville, KY 40202.
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